Should publicly traded oil and gas producers be telling suppliers and contractors to cut rates during this current low oil and gas price environment?
The fact that some major producers have issued such notifications indicates they believe it is good business practice, but it’s not good public relations.
It has certainly generated some bad publicity in southeastern Saskatchewan where some upset suppliers have complained in the media.
In a free competitive economy, the company with the best price or service value will get the job without having to be told by another business what to charge for their products and services.
Competition is the basis of a free market economy.
Producers could simply rely on a competitive bidding process instead of sending notifications to cut rates reportedly by up to a certain percentage.
Contractors and suppliers aren’t cartels that have secretly conspired to keep rates and services at artificially high prices to make more profits in a downturn or a boom.
Producers need to shop for services the same way consumers do online for hotel rooms, for example, comparing all of the rates and services from available providers.
There is no harm in asking preferred suppliers or contractors if they can cut costs or provide more value. It’s what consumers do on a daily basis.
All small companies have their own expenses to contend with and budget accordingly.
Those that can afford to make cuts to be more competitive during the downturn will do so without having to be advised in a blanket notification.
In good times, producers don’t tell suppliers when to expand or increase rates so why should they tell them how to price their goods and services today?
It just seems out of whack with running your own business in a competitive market.
Competition will weed out the greedy from the thrifty. Telling a business to cut rates by 10 or 20 per cent or risk not getting any work could put that business out of business.
Clearly that’s not the role of any business.
The Canadian Association of Petroleum Producers reported in January that capital spending was being slashed by $23 billion in Western Canada by the big players.
When it comes to how some major producers cut their own operating costs it seems to mean not having to cut dividend payouts to shareholders.
Playing the devil’s advocate, why do suppliers and contractors who don’t have shareholders have to pay for another company’s payouts to investors?
Share prices go down during a commodity downturn anyway so reducing dividends might improve the bottom line while still keeping shareholders who buy low.
It is easy to ask, if a producer can afford to produce oil and still pay full dividends, then why are they asking others to take a financial hit on their behalf?
It doesn’t seem right knowing that small businesses are the ones who employ the most people and pay the most taxes collectively.
Large companies simply have to go shopping for bargains instead of imposing them.
On the other hand playing the devil’s advocate for large producers, it is natural for small business to assume the big players are raking in the dough throughout the year because they are big and powerful.
However, that’s clearly not the case, as quarterly results rarely reflect major profit gains even in boom times due to increased investment in future production.
Nobody begrudges big producers making profits and selling shares; it’s what makes the corporate world go around.
Finding and producing oil is incredibly costly in the best of times.
The point here is, for producers and suppliers to let the market take care of rates and prices just as it is with oil and gas prices.
